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IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Present value and accumulated value of cashflow streams

Rohan invests Rs 50,000 in a bank deposit that pays interest at 8% per annum effective. What is the accumulated value of the deposit after 3 years, to the nearest rupee?

The accumulated value is Rs 62,986. Compound interest multiplies the deposit by 1.08 each year, so 50,000 times 1.08 cubed, which is 1.259712, gives about Rs 62,985.6. Simple interest would give only Rs 62,000, ignoring interest earned on interest.

  1. ARs 62,000
  2. BRs 62,986Correct
  3. CRs 62,986.00 less tax
  4. DRs 61,200
  5. Rs 63,000

Explanation

Accumulated value = 50,000 x 1.08^3. 1.08^2 = 1.1664 and 1.1664 x 1.08 = 1.259712. 50,000 x 1.259712 = 62,985.6, which rounds to Rs 62,986. Rs 62,000 uses simple interest (50,000 x 1.24 = 62,000), which is the wrong method.

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